The Resumption of The Big Dollar Slide?

The US dollar hit a record low against the euro today, of about .83 €/$. It’s been trending down for the last year and a half, so that’s not that surprising. But listen to what currency traders were saying today:

Traders cited two factors behind the dollar’s fall.

First, Commerce Undersecretary Grant Aldonas told reporters that the Bush administration has decided to set new quotas on textile imports from China… The timing of the measure seemed odd, given that the World Trade Organization just ruled that the United States’ steel tariffs are illegal and given that Treasury Secretary John Snow said yesterday that the United States wasn’t headed into a “protectionist mode.”

Okay, that’s not surprising either – neither the Bush administration contradiction of its own economic team, nor the protectionism. However, this definitely caught my attention:

[Second], the Treasury Department released figures showing that foreign investment in U.S. stocks and Treasurys slowed sharply in September — which pressures the dollar since there’s less apparent demand for U.S. assets.

Breaking down the numbers, foreign investors sold $6.3 billion worth of U.S. equities compared with $11.5 billion worth of equity purchases in August. They bought just $5.6 billion worth of Treasurys — down sharply from the $25.1 billion they bought the month before.

The drop off in Treasury buying was especially notable since the Japanese government reported that it bought $40 billion of the U.S. currency in September in its efforts to stem the yen’s strength. Much of that money would have gone into Treasurys. The suggestion is that some other country or countries were big sellers.

So, which foreign country could plausibly have sold $35 billion in US Treasury bonds in one month? Only one candidate immediately leaps to mind: China. Given the gigantic stocks of US Treasurys that China owns, this news reminds me of some of my long-standing concerns and makes me wonder if there isn’t worse to come in the months ahead for the dollar.